Lease Considerations for Franchised Businesses

April 23, 2014

By Renee B. Gerstman &

Susan E. Wells

Franchised businesses pose unique leasing issues that the broker or agent should be aware of at the outset of representation. The primary difference is that in franchise context, you will need to satisfy your client, the franchisee, as well as the franchisor. To accomplish this, ask your franchisee client for all information provided by the franchisor regarding site requirements, operational requirements and a copy of any lease addendum or rider to be used. Involve the franchisor in the site selection and lease process sooner rather than later. The franchisor should have expertise in what sites would be preferable for the franchised business’s layout, build out and operations; and will probably have the right to approve or disapprove the site and the lease.

The franchisor may have specific requirements for the type of location in which the business can be operated. For example, there may be requirements for signage, visibility, traffic volume, types of business that can be in the same center, etc. You can find a great location and space, but if they do not meet those requirements, they will not be approved by the franchisor. A franchisee that signs a lease before getting the franchisor’s approval, or at least input, may be stuck with a space that he/she cannot use for the franchised business.

The lease must dovetail the requirements contained in the franchise agreement. For example, is the franchisee required to be open during certain hours? If so, only properties that permit operation during those hours should be considered. Franchise agreements typically have deadlines by which the franchised business must begin operations. Finding a great location and space may not be enough. You must also make sure that the space will be available and all tenant improvements completed in a timely manner.

If the lease permits the landlord to relocate the franchised business to a different suite, either seek to eliminate that right or obtain the franchisor’s consent to that provision. Otherwise, the relocation may result in a breach of the franchise agreement. Similarly, the term of the lease (inclusive or exclusive of options) should be in sync with the term of the franchise agreement. If the franchisee is required to relocate because he/she loses possession of the site, the franchisee may be in breach of the franchise agreement; in any event, relocation is disruptive to the good will of the business and causes significant additional expense.

A franchisor’s addendum or rider typically requires the landlord to give the franchisor notice of the franchisee’s breach of lease and provide the franchisor (and a substitute franchisee) the right to assume control of the site on the same terms as the original franchisee, frequently without obtaining the landlord’s approval or payment of an assignment fee. Although a franchisor’s requirements may be negotiable, depending upon the desirability of the site and the leverage of the franchisor, communicating these issues to the landlord as part of your initial discussions will enable you to focus on sites at which those requirements will not be a major stumbling block

Although tenants operating franchised businesses pose unique issues, becoming aware of a franchisor’s requirements at the outset will empower a broker to facilitate effective communication and negotiation strategically on behalf of his/her client.

Susan E. Wells and Renee B. Gerstman are partners at Jaburg Wilk. Susan’s corporate and business practice encompasses all aspects of business matters and commercial relationships in numerous industries including extensive experience representing both franchisees and franchisors. Renee’s background is in real estate and business transactions, commercial litigation and representation of small to medium sized businesses.